October 2, 2019

Breakingviews: Election year could be potent M&A sedative

by Breakingviews.

Healthcare dealmakers have been busy, but may be due for a bit of enforced respite. The sector has made up the largest chunk of global deals in the first nine months of the year: 25% of U.S. activity on a dollar basis according to Refinitiv data. Presidential elections next year will inject uncertainty, however, because the sector is so dependent on government policy, and what some candidates are proposing could dampen dealmaking for years.

Drugmakers accounted for more than three quarters of the $340 billion of announced U.S. healthcare deals so far this year. Among them, Bristol-Myers Squibb agreed to buy Celgene for $74 billion, and AbbVie snagged Botox-maker Allergan for $63 billion. If all of the deals tracked by Refinitiv are completed, it would be the biggest year for pharmaceuticals mergers on record.

Keeping Americans healthy is an inherently political issue. The U.S. spends around 18% of GDP, on healthcare, and the government will pay for about half of all U.S. healthcare spending within the next decade, estimates the Department of Health and Human Services. That makes healthcare providers’ profits a target for politicians, and a subject of great interest to voters.

The resulting uncertainty may explain why, in four of the past six political cycles, merger activity in the sector fell during an election year. Democrats generally favor more government control, and the Republicans less. Insurers, hospitals and drug firms tend to avoid making big deals during presidential election years, to avoid attracting unwanted attention or making big bets that look foolish later.

Next year will have far more uncertainty than most. Democrat contender and Massachusetts Senator Elizabeth Warren has called for an end to private health insurance and what she calls “Medicare for All,” which suggests expanded access, but tighter control on spending. Other Democrats want to expand the Affordable Care Act – a program of publicly funded healthcare that President Donald Trump still wants to dismantle.

Perhaps the closest corollary is the early 1990s, when Bill Clinton campaigned on providing universal healthcare and spent his first years in office trying to deliver it. During this period, companies almost entirely refrained from M&A. Then after industry opposition scuppered Clinton’s efforts, the value of deals struck exploded 19-fold. Healthcare companies are lively now, but a period of sedation looks likely.


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